April 2012 will see HM Revenue & Customs’ (HMRC) new rules come into effect regarding the availability of ­capital allowances for purchasers of ­fixtures. This article considers the changes made to the existing rules and the impact such changes will have for solicitors involved in commercial ­property conveyancing.

Current position

When commercial property is acquired, the availability and quantum of capital allowances for the purchaser of the property on the fixtures contained within are dependent on whether any capital allowances have ­previously been given. For capital allowances purposes, a fixture is defined at section 173(1) of the Capital Allowances Act 2001 (CAA 2001) as: ‘(1) In this chapter "fixture" - (a) means plant or machinery that is so installed or otherwise fixed in, or to, a building or other description of land as to become, in law, part of that building or other land; and (b) includes any boiler or water-filled radiator installed in a building as part of a space or water heating system.’

Section 185 of the 2001 act states that the purchaser’s entitlement to capital allowances is restricted to the disposal value that the past owner of the property brought into account, even where this may have not been the immediate past owner, and it is the responsibility of the purchaser to obtain and provide details of prior claims and disposal values. If it is established that no restriction applies under section 185, then the purchaser’s entitlement is governed by section 562 of the CAA 2001, which requires the purchaser to undertake a ‘just and reasonable apportionment’ of the purchase price for the property to establish the level of capital allowances available.

In cases where the seller has made a capital allowances claim for fixtures, then it is possible for the seller and purchaser to jointly elect to fix the disposal value for the fixtures on the sale of the property (section 198 election). Once made, the election is irrevocable and, importantly, binds all parties, including HMRC, to the figure set out therein. For solicitors involved in commercial property conveyancing, their first involvement with capital allowances on a property transaction will be to ­provide details to complete section 19 of the commercial property standard enquiries (CPSE) form.

This asks the seller’s solicitor to answer various questions on the capital allowances history of the property and, if applicable, whether a section 198 election will be entered into. However, direct experience of reviewing the documentation from hundreds of property transactions shows that, in the majority of cases, the capital allowances part of the CPSE form is not completed satisfactorily. The most common answers are: ‘not known’; ‘not as far as the seller is aware’; or ‘refer to accountant’. In many cases, however, the purchaser’s solicitor is equally culpable, as evidence suggests that they do not adequately follow up on the answers provided to ensure purchasers have the necessary answers they require to make timely assessments of their potential entitlement to capital allowances.

As a result of the significant increase in capital allowances claims for fixtures in historic property acquisitions over the past couple of years, HMRC has become concerned that, because of perceived defects in the current rules, tax is being avoided as capital allowances are considered to be given on more than the original cost of the fixtures, contrary to policy intent.

New rules

Following the publication in May 2011 of the consultation document, together with the response to that consultation, on 6 December HMRC published on draft legislation for inclusion in the Finance Bill 2012 setting out new rules on ­capital allowances for fixtures. The new rules will take effect from April 2012, though there will be a transitional period for certain elements of the new rules up to April 2014.The legislation will make the ­availability of capital allowances for purchasers of fixtures dependent on:

  • previous expenditure on fixtures being pooled at any time before a sale; and
  • the seller and purchaser either jointly electing under section 198 of the CAA 2001, or using First Tier Tribunal proceedings under section 563 of the act, to agree the value of the fixtures within two years of the sale; or
  • in exceptional circumstances, the past owner providing a written statement of the disposal value for fixtures they had some time earlier been required to bring into account within two years of a later sale.

For expenditure incurred before April 2012, both the pooling requirements and formal fixing of the value for fixtures are not applicable and, for expenditure incurred between April 2012 and April 2014, the pooling requirement is also not applicable.

The original proposal to force mandatory pooling for fixtures within one or two years of a sale has been replaced with an open-ended timeframe up to the point the property is sold. There will also be no ‘catch-up’ requirement for properties acquired before April 2012.

Additionally, the proposal to introduce a ‘record of agreement’ on disposal between seller and purchaser has been dropped in favour of using the existing legislative procedures of a joint election or independent determination by the First Tier Tribunal.

The other key area of the original proposals - the imposition of tax written-down value for joint elections - has also been dropped, meaning sellers and purchasers are still free to determine the value at any level up to the original cost of the fixtures.What do these new rules mean for solicitors involved in commercial property conveyancing?

The key will be for solicitors to adopt a much more proactive approach to the issue of capital allowances. This will begin with full and detailed replies to CPSE enquiries on capital allowances (Q.19) so both sellers and purchasers are aware, from the outset of a transaction, what the key capital allowances areas are that need to be addressed to ensure they are dealt with effectively. If capital allowances are not pooled by the seller in time, then no capital allowances will ever be available to the purchaser or any future owner of the property.

The other key area will be where expenditure has been pooled to ensure that a section 198 election is properly completed or, if that cannot be agreed by the parties, ensure clients are aware of the procedure to enable determination of value through the First Tier Tribunal. Again, as for the pooling requirement, failure to complete either of these steps will mean no capital allowances for the purchaser of any future owner.

Conclusions

The draft legislation as published represents a significant change to the original proposals put forward in the consultation document and is very welcome for all businesses.

It is encouraging that the views of businesses and advisers expressed during the consultation period were listened to by HMRC and HM Treasury to produce a regime that more properly reflects the reality of achieving the desired policy objective.

Solicitors should, in conjunction with specialist capital allowances advisers and accountants, take a much more proactive role in the capital allowances process to enable businesses to ensure timely and effective use of the available reliefs.

Stephen Dunham is managing director of Active Tax Solutions